UPM Annual Report 2021

ACCOUNTS FOR 2021

UPM

BEYOND FOSSILS

STRATEGY

BUSINESSES

RESPONSIBILITY

GOVERNANCE

State of the art mill design The pulp mill has been designed as an efficient single-line operation. The machines, materials, level of automation and standards enable a high operating rate and maintainability, as well as a high energy output. This ensures excellent safety, high environmental performance, and low operating costs during the long lifecycle of the mill. The mill is designed to fully meet strict Uruguayan environmental regulations, as well as international standards and recommendations for modern mills, including the use of the latest and best available technology (BAT). The mill's environmental performance will be verified through comprehensive and transparent monitoring. The mill's initial annual production capacity is 2.1 million tonnes, and the environmental permits enable further capacity potential. When in operation, the mill generates more than 110 MW surplus of renewable electricity. Efficient logistics set-up An efficient logistics chain will be secured by the agreed road improvements, extensive railway modernisation and port terminal construction. The Public-Private-Partnership agreement between the government and the construction company for the construction of the central railway was signed in May 2019. Works on the central railway are proceeding, but the overall rail project is delayed, and the railway is scheduled to start operations in May 2023. UPM has a contingency plan in place to ensure logistics with truck transportation during this delay. UPM is proceeding with the construction of a deep-sea pulp terminal at Montevideo port with an investment of approximately USD 280 million. Direct rail access from the mill to a modern deep-sea port terminal creates an efficient supply chain to world markets. The Montevideo deep-sea port also enables synergies in ocean logistics with UPM’s existing Uruguay operations. UPM entered into a port terminal concession agreement in 2019 and signed an agreement on rail logistics services in October 2020. Both agreements are considered in accordance with IFRS 16 Leases. The total amount of such lease payments is expected to be USD 200 million. Significant impact on the Uruguayan economy Based on independent socioeconomic impact studies, the mill is estimated to increase Uruguay’s gross national product by about 2% and the annual value of Uruguay’s exports by approximately 12% after completion. In the most intensive construction phase, more than 6,000 people will be working on the site. When completed, approximately 10,000 permanent jobs are estimated to be created in the Uruguayan economy of which approximately 4,000 would involve direct employment by UPM and its subcontractors. About 600 companies are estimated to be working in the value chain. The mill will be located in one of Uruguay's many free trade zones and will pay a fixed annual tax of USD 7 million. The mill's value chain is expected to contribute USD 170 million in annual taxes and social security payments and to contribute USD 200 million annually in wages and salaries. Project schedule and capital outflow The mill was originally scheduled to start up in the second half of 2022. The successive waves in the pandemic and tight global supply chains have caused some challenges to the project. Hence, the start-up schedule has been updated to take place by the end of Q1 2023, and the total investment estimate has been increased by 10% to USD 3.47 billion.

More than 6,000 people are currently working on the project at the various construction sites. Strict COVID-19 protocols have been maintained at all UPM’s construction sites. At the pulp mill site in Paso de los Toros, the installation phase with mechanical erection continues to progress in all main process areas and EIA erection works have started. Majority of large civil works have been completed. Power boiler pressure test was done successfully in December. Commissioning works will proceed in the coming months. Large scale cargo transfers from the UPM Fray Bentos port to the new mill site continue and include the transports of the machinery, equipment, and structures necessary for the construction of the UPM Paso de los Toros mill. A large part of the pulp terminal area in Montevideo has been completed, including the structure and roofing of the pulp warehouse – an area of 50,000 square meters. The unloading lines for the railway were also completed and construction of railway has continued. Piping, pipe bridge, auxiliary machinery and electrical installation work continues on the port basin. The total capital expenditure of USD 3.47 billion will take place in 2019-2023, with 2021 and 2022 being the most intensive years. UPM will hold 91% ownership of the project and a local long-term partner which has also been involved in UPM Fray Bentos, owns 9%. UPM’s investment will mainly be financed from operating cash flow complemented by regular group financing activities. Biochemicals refinery investment On 30 January 2020 UPM announced that it would invest EUR 550 million in a 220,000 tonnes next-generation biochemicals refinery in Leuna, Germany. Originally, the biorefinery was scheduled to start up by the end of 2022. However, the pandemic has slowed down the completion of the detailed engineering in Leuna. Disruptions to global supply chains have affected both the availability and costs of critical construction materials. Hence the start-up schedule has been updated to take place by the end of 2023. The capital expenditure estimate will be updated in due course. The biorefinery will produce a range of 100% wood-based biochemicals, which will enable a switch from fossil raw materials to sustainable alternatives in various consumer-driven end-uses. The investment opens up totally new markets for UPM, with large growth potential for the future. The industrial scale biorefinery will convert solid wood into next generation biochemicals: bio-monoethylene glycol (BioMEG) and renewable functional fillers. In addition, the biorefinery will produce bio monopropylene glycol (BioMPG) and industrial sugars. Once the facility is fully ramped up and optimized, it is expected to achieve the ROCE target of 14%. A combination of sustainable wood supply, a unique technology concept, integration into existing infrastructure at Leuna as well as the proximity to customers will ensure the competitiveness of operations. The safety and sustainability of the value chain will be based on UPM’s high standards. InfraLeuna GmbH, in the state of Saxony-Anhalt, offers very competitive conditions for constructing a biorefinery with its logistics arrangements and infrastructure for various services and utilities. In October 2020, UPM entered into service agreements with InfraLeuna GmbH related to wood handling, wastewater treatment and other utilities, which will be recognised as lease assets and liabilities under IFRS 16 Leases upon the commencement date. The total amount of such lease assets and liabilities is estimated to be EUR 100 million.

Construction at biorefinery-site in Leuna continues and we have now started erecting the overground structures. Permitting has proceeded in accordance with German legislation. Commercial activities continue to proceed positively in different product and application areas. After the launch of UPM BioMotion™ Renewable Functional Fillers (RFF) in October, joint product development activities with potential customers in the rubber value chain have progressed further as have discussions with OEMs, especially in the automotive sector, with promising results regarding both technical and commercial viability of our product. We made further progress in taking renewable monoethylene glycols (bMEG) to market, advancing sales capabilities and also in this category extending pre-commercial discussions with potential customers as well as end-users in packaging, textile and automotive end-uses. The environmental benefits of the UPM Biorefinery and the UPM Biochemicals portfolio continue being publicly acknowledged with nominations as finalist for the German Sustainability Award and the Chemical Week‘s sustainability awards and an improved sustainability ranking in the European Rubber Journal. Research and development facilities on site in Leuna are being extended and application development centres for rubber and glycols are now operational. The hiring process for the operations teams has progressed and we have started a comprehensive training and simulation programme for our new operations teams based on the Digital Twin solution of biorefinery and its processes. Biofuels business development In January 2021, UPM announced that it moves forward with biofuels growth plans and starts the basic engineering phase of a next generation biorefinery. The potential biorefinery would have an annual capacity of 500,000 tonnes of high-quality renewable fuels including sustainable jet fuel. The products would significantly reduce the carbon footprint of road transport and aviation, as well as replace fossil raw materials with renewable alternatives in chemicals and bioplastics. In the feedstocks, wood biomass-based residues and side streams play a substantial role. In addition, it would use sustainable liquid waste and residue raw materials. UPM is proceeding with a detailed commercial and basic engineering study to define the business case, select an innovative technology option and sustainable feedstock mix and estimate the investment need. During the study UPM has completed site assessments in two locations: Kotka, Finland and Rotterdam, the Netherlands. Work continues in Rotterdam, where the operating environment is more favourable for the biofuels business. If all preparations are concluded successfully, UPM would initiate the company’s standard procedure of analysing and preparing an investment decision. Due to the current challenging investment environment for new major projects like this, further decisions are not planned before the end of 2022. OL3 power plant project Teollisuuden Voima Oyj (TVO) is in the process of constructing a third nuclear power plant unit, OL3 EPR, at the Olkiluoto site (OL3). UPM participates in OL3 through its shareholding in Pohjolan Voima Oyj (PVO), which is the majority shareholder in TVO. UPM’s indirect share of OL3 is approximately 31%. The OL3 plant supplier, a consortium consisting of AREVA GmbH, AREVA NP SAS and Siemens AG (Supplier), is constructing OL3 as a turnkey project.

The start of regular electricity production, originally scheduled for April 2009, has been revised several times by the Supplier. As announced by TVO, fuel loading of OL3 was completed in early April 2021. On 16 December 2021 TVO announced, that the Radiation and Nuclear Safety Authority in Finland (STUK) had granted the permission for making the OL3’s reactor critical and conducting lower power tests. The electricity production of OL3 is scheduled to start at in February 2022, and the regular electricity production in June 2022. On 21 December 2021, TVO announced that OL3’s reactor started up, i.e. the first criticality of OL3 was reached. As announced by TVO earlier, Areva, the Supplier party, was preparing a financial solution to ensure necessary funding to complete the OL3 project. TVO and the Supplier also negotiated on the terms of completing the OL3 project. On 17 May 2021 TVO announced that TVO and the Supplier reached a consensus in their negotiations regarding the main principles of the OL3 project completion. The agreements regarding the amendments to the Global Settlement Agreement of 2018 entered into force on 13 July 2021. When completed, OL3 will supply electricity to its shareholders on a cost-price principle (Mankala-principle) which is widely applied in the Finnish energy industry. Under the Mankala-principle electricity and/or heat is supplied to shareholders in proportion to ownership, and each shareholder is, pursuant to the specific stipulations of the respective articles of association, severally responsible for its respective share of the production costs of the energy company concerned. OL3 will increase UPM Energy’s electricity generation capacity significantly. The new power plant unit is expected to be highly efficient and meet the highest safety standards. Its power generation will be CO 2 -free and TVO will have a secure solution for the final disposal of used fuel. Events during the year 2021 On 19 January, UPM announced that it would invest EUR 13 million in UPM Raflatac’s new production line in Nowa Wie ś , Poland. The investment will increase UPM Raflatac’s Direct Thermal (DT) Linerless annual production capacity by 100 million m2. The start-up of the new production line was at the end of 2021. On 28 January, UPM announced that it moves forward with biofuels growth plans and starts the basic engineering phase of a next generation biorefinery. On 17 February, UPM announced that it has joined The Climate Pledge, a cross-sector community of world-class companies working together to crack the climate crisis and to decarbonise our economy. These companies are committed to reach the targets of the Paris Agreement well in advance. On 15 March, UPM announced that it has issued a new EUR 500 million Green Bond under its EMTN (Euro Medium Term Note) programme and its Green Finance Framework. The bond matures in March 2031 and pays a fixed coupon of 0.50%. On 19 March, UPM announced that it has applied for listing of a EUR 500 million Green Bond under its Euro Medium Term Note (EMTN) programme on the Irish Stock Exchange plc, trading as Euronext Dublin. On 25 March, UPM announced that UPM Timber has completed the employee consultation process that started in early February regarding its plans to improve profitability and strengthen competitiveness. Based on the negotiations, the number of positions at UPM Timber will decrease by 43. In addition, the small log line at the Kaukas sawmill will be closed by the end of June 2021 and the operating model of the Korkeakoski sawmill will be optimised. On 26 March, the Radiation and Nuclear Safety Authority (STUK) gave a fuel loading permit for the OL3 EPR unit.

124

UPM FINANCIAL REPORT 2021 125 UPM ANNUAL REPORT 2021 125

UPM ANNUAL REPORT 2021

UPM FINANCIAL REPORT 2021 124